[Intl-tobacco] Philip Morris, Others See Smoking Gun in Korea Rules

[Robert Weissman]

Philip Morris, Others See Smoking Gun in Korea Rules (Update4)
by Youngsam Cho
Source: Bloomberg News, Thursday, 5/10/01

Seoul, May 10 (Bloomberg) -- Philip Morris Cos., Japan Tobacco Inc. and
other foreign cigarette makers anxious to expand in Korea say government
deregulation aimed at opening the world's eighth-largest tobacco market to
foreign companies may instead keep them out.

For the first time, imported cigarettes will be levied with a tariff of 40
percent starting July 1. While the rules allow companies to make
cigarettes in Korea, they will have to produce at least 5 billion
cigarettes a year. That's half of all foreign- brand cigarettes sold in
Korea last year and more than any of the three biggest foreign brands sold
in 2000.

The new regulations fly in the face of ``ensuring fair competition among
all manufacturers,'' Philip Morris, the world's largest cigarette company,
said in a statement e-mailed to Bloomberg News. ``We will be suggesting
revisions.''

Foreign tobacco-makers aren't alone in scratching their heads about
Korea's definition of deregulation. Under terms of the International
Monetary Fund's $58 billion bailout in 1997, the government agreed to open
its industries to overseas ownership and competition. That's been a
difficult pledge to keep politically, when so many domestic industries are
struggling to pay off debt and turn profits.

The sale of state-owned Korea Telecom Corp. has been snarled by government
meddling, and in the financial industry, only one state bank, Korea First
Bank, has been sold. The government's plan to open the credit card
industry to foreigners has drawn criticism for setting the bar too high
for them to jump.

``The government is trying to pretend that it is opening the market to
foreign companies, but it is setting the standards very high,'' said James
Rhee, an analyst at Dresdner Kleinwort Wasserstein in Seoul.

                         Primed For Profit

For foreign tobacco makers, South Korea is a market primed for profit. Its
13 million smokers puffed away on 105 billion cigarettes last year in a
society where smoking is condoned and health warnings are few.

South Korea has one of the highest concentration of teen-age smokers in
Asia and the biggest proportion of male smokers in the world, according to
the Organization for Economic Cooperation and Development.

State-run Korea Tobacco & Ginseng Corp., which owns seven factories in the
nation, retains a monopoly on domestic production and accounts for nine of
every 10 cigarettes sold.

Philip Morris has a 4.2 percent share, with 4.4 billion cigarettes sold
last year. Japan Tobacco trailed with 3.5 percent, or 3.6 billion; and
British Tobacco Plc had 1.7 percent, with 1.8 billion cigarettes.

Foreign cigarettes, which have held that slim share with brands prices up
to a third more than local brands, now face a 40 percent tariff aimed at
encouraging them to open local factories.

``Because it normally takes at least three years to set up
cigarette-manufacturing facilities, foreign tobacco companies would
essentially have to pay the higher tariffs without reaping any benefits
from local manufacturing facilities during that time,'' said Chung Jae
Hoon, a spokesman for British American Tobacco Plc.

Philip Morris and Japan Tobacco said they will present their complaints at
public hearings on the new measures next week.

The government, though, hints it won't budge.

``There is no change in our position,'' said Moon Chang Mo, a senior
director at the Ministry of Finance and Economy. ``The 40 percent tariff
isn't that high compared with the 60 percent to 70 percent imposed in
other countries.''

Korea Tobacco shares rose 2 percent to 60,600 won. The stock is down about
10 percent so far this year.